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Bankruptcy: Debtor’s Prison Abolished!
By Mark Markus | July 20, 2009
That’s right. Thanks to federally enacted law, one can no longer be sent to prison for failure to pay their debts. When did this become effective? In 1833. Yes, I said 1833. Andrew Jackson was president of the United States. Why do I bring this up now? Because not a week goes by in my bankruptcy practice that a potential client doesn’t ask me if they will go to jail because they owe money to creditors. You cannot go to jail because you owe money and can’t pay your debts.
There is always significant misinformation floating around regarding the bankruptcy laws and what they can or cannot accomplish (see for example the new bankruptcy laws enacted in 2005 as an example where people still think that one cannot file Chapter 7 on credit card debts–a complete falsehood propagated by the media). But the “new” bankruptcy laws are only 3-4 years old. Debtor’s prisons were abolished 176 years ago. I doubt any of my clients were born prior to then, and yet there is still a perception in our society that this law exists.
Prior to 1833 debtors were allowed out of prison if they gave up all of their assets. Presently, creditors can undertake collection activities allowed under applicable state law, such as garnishing wages, seizing bank accounts, placing liens against real estate and other property, etc. One can file a Chapter 7 or 13 bankruptcy case and get rid of most debts (i.e. discharge the debts) in return for giving up any NON-exempt assets they have (in Chapter 7) or paying out the equivalent value of said assets over time (in a Chapter 13). Every state has exemptions which protect the value in various assets, so one is always allowed to retain some (and frequently ALL) of the their assets when filing for bankruptcy relief.
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2 Responses to “Bankruptcy: Debtor’s Prison Abolished!”
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July 24th, 2009 at 7:58 PM
This is a helpful post. Most of the people having financial problems due to debt have this in mind. It is but normal though that thinking to be in prison due to debt is the thing that fears these clients because of these demands letters and harassment experienced. Consulting with a bankruptcy attorney will help them understand the process of how helpful it is to file a bankruptcy.
August 25th, 2009 at 7:53 AM
Agreed. I have a small practice in NC and when a potential client can’t afford to file bankruptcy, I give them a standard speech including the fact that there are no debtor’s prisons in the US and they can’t go to jail for simply not paying a debt. I, then, explain what creditors can do in collection in NC. More than half the time, the potential client is shocked that they won’t go to jail. They are equally shocked when I tell them they can write the creditor to revoke permission to draft their bank account – often social security recipients getting $1,200 per month with no assets paying $100 / month to a creditor by automatic bank draft.